Tariffs - even the mention of them can incite negative reactions within certain markets, sometimes rippling throughout the global economy. But why do tariffs cause this type of reaction? The answer within the construction industry is clear: Uncertainty of costs. Because construction is largely driven by lump sum contracting, the art of bidding becomes even more critical to a project's (and contractor's) success since even the threat of tariffs can destabilize material prices.

What is a contractor to do? Besides investing in crystal balls, contractors have options to protect themselves against the sting of potential price escalations as a result of tariffs. To maximize the potential for success, however, contractors must understand what avenues are available on the road to success and which ones are dead ends.

Tariffs are nothing new. In fact, the U.S. has a long history with tariffs, which until roughly 100 years ago, were a large source of income for the federal government. Although the recent past has not seen significant tariffs imposed, that changed on March 8, 2018 when President Trump issued Presidential Proclamation 9705. This Proclamation, among other things, instituted a 25 percent tariff on steel imports. Although the tariff's effects are disputed, one thing is certain: The steel market has been injected with a healthy dose of uncertainty. Will the cost of steel in the U.S. rise? If so, by how much? Will domestic steel producers keep pace with increased demand? How long will the tariff last? These questions weigh heavy on the nation's construction industry – especially for multi-year projects where the impact of material price escalations could be felt more prominently.

What should contractors do to manage these risks? An equally good question is what should contractors not do?

First, do not assume that standard contract language is enough during non-standard times. Of course, there are basic provisions that serve to justify requests for price modifications. But standard contract language will likely fall short of what contractors now need. Outdated material escalation clauses may not have the correct breadth of coverage to guard against a bid bust caused by tariff pricing. And, with few exceptions, courts will enforce contracts as written regardless of whether the terms are fair.

Second, do not assume that a standard force majeure clause will be an adequate catch-all to protect against tariff-caused losses. A force majeure provision excuses a party's performance due to an unforeseen, supervening event beyond the parties' control – such as natural disasters, terrorism and war. But embedded within most force majeure clauses is a requirement that the specific act or event was not reasonably foreseeable at the time the parties entered the contract. Thus, even if tariffs are a covered event, the party invoking it would be responsible for proving that the tariff was not reasonably foreseeable: A tricky task in the current economic climate.

Third, do not assume that the courts will excuse performance out of fairness. When unusual events impact performance, parties may attempt to seek refuge in the defense of commercial impracticability. Commercial impracticability is "an excuse from performance due to extreme and unreasonable difficulty, expense, injury or loss involved." And while commercial impracticability has served as an excuse to further performance of a contract for over a century, its usefulness can be quite limited and risky for several reasons.

Commercial impracticability is an excuse to a default of a contract. This means that without proving that further performance was commercially impracticable, the promissor will be pinned as the defaulting party. And since the typical situation giving rise to a claim for impracticability is one in which the promissor has refused to continue performance, the financial consequences, if it is wrong, can be very significant because of the increased costs to complete the work, which – ironically – is the reason for not continuing performance.

Using the imposition of tariffs to prove commercial impracticability may be too risky under most conditions. Almost uniformly, courts do not find impracticability where there is a mere increase in the expense of contract performance. Instead, increased expense will only excuse performance where the expense to perform the contract changes the nature of the performance to something different than what the parties agreed. A difference in degree is insufficient.

Why so harsh? Courts are not in the business of rewriting contracts. Since impracticability is an excuse to further performance, courts are cautious to find impracticability only in those extreme cases where reasonable planning and risk-shifting could not account for present conditions. Thus, whether tariffs were reasonably foreseeable to the parties when the contract was entered will be a critical issue and un-foreseeability may be challenging to prove.

However, studies confirm that contractors who implement and update their risk management processes generally see better overall project performance, including better financial outcomes. So in times of uncertainty, contractual risk-shifting is one of the most effective techniques to successfully allocate and manage risk.

Where to Start?

Start at the beginning: Scope of work. It's a tale as old as time – a contractor discovers that it has a scope of work gap in its bid, but it's too late to withdraw, the contract is signed and work has started. Or perhaps the contractor listed dozens of exclusions in its contract – so many that the owner believes anything not expressly excluded from the contract is included when that was not the contractor's intent. While problematic in stable times, in times of cost fluctuations, the effect could be ruinous. Now, more than ever, contractors should double-up on their efforts to catch potential scope errors.

A well-drafted scope of work clause identifying the inclusions, and if appropriate, the exclusions, is a great starting point. Courts will look to written terms to resolve disputes. By bolstering the scope of work clauses, contractors take control of their destiny and better avoid future – and costly – conflicts during construction.

Similarly, critically review and modify material escalation and force majeure clauses. Ask whether:

• the express terms of the contract clearly state what event will trigger a change in performance or cost;
• the contract identifies when the contractor is entitled to additional compensation for price escalation of identified materials;
• the contract expressly identifies how to calculate the additional compensation; and
• the contract expressly state how to resolve a dispute regarding material price escalation.

If the answers are "no," then it is time to revise that contract. Negotiating these terms at the beginning will manage risk and expectations. As noted above, courts will provide little to no relief to a party that does not protect itself and will not read in intention or add terms that the parties could have, but didn't, include in the contract. The contractor's best risk management strategy is to analyze the risks of the project and negotiate terms that are fair and reasonable.

But not all projects are created equal. With big infrastructure projects moving forward, what can a contractor do with the take-it-or-leave-it provisions embedded in public works contracts? While contract negotiating is virtually nonexistent on public works projects, this does not mean that a contractor has no options. Instead, there are steps a contractor can take.

For instance, contractors should take advantage of pre-bid meetings to explore solutions to known obstacles. In addition, contractors should be mindful of their scopes of work and define exclusions clearly, if necessary. But the only tried-and-true method of protection is to have the bid reflect the level of risk the contractor can withstand. A race to the bottom usually ends badly for everyone. If the bid is too lean, a contractor runs the risk of under-funding its entire operation or succumbing to the temptation to make up the difference in dubious change orders, which can cause far more problems under the False Claims Act. And while it may seem counter-intuitive, sometimes losing a job is a win.

While tariffs can create uncertainty, they also create opportunities. Here, the opportunity to improve internal processes to reduce risk in these uncertain times is at hand. Those who adapt to the changing times will reap significant rewards.